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But we did begin to argue about moneyBy the time...
Posted on 2010-Feb-11 at 11:31
But we did begin to argue about moneyBy the time I was 16, I probably had a far better foundation with money than both my mom and dad I could keep books, I listened to tax accountants, corporate attorneys, bankers, real estate brokers, investors and so forth My dad talked to teachers
One day, my dad was telling me why our home was his greatest investmentA not-too-pleasant argument took place when I showed him why I thought a house was not a good investment
The following diagram illustrates the difference in perception between my rich dad and my poor dad when it came to their homesOne dad thought his house was an asset, and the other dad thought it was a liability
I remember when I drew a diagram for my dad showing him the direction of cash flow I also showed him the ancillary expenses that went along with owning the homeA bigger home meant bigger expenses, and the cash flow kept going out through the expense column
Today, I am still challenged on the idea of a house not being an chloe handbag assetAnd 1 know that for many people, it is their dream as well as their largest investmentAnd owning your own home is better than nothingI simply offer an alternate way of looking at this popular dogmaIf my wife and I were to buy a bigger, more flashy house we realize it would not be an asset, it would be a liability, since it would take money out of
our pocket
So here is the argument I put forthI really do not expect most people to agree with it because a nice home is an emotional thing And when it comes to money, high emotions tend to lower financial intelligence 1 know from personal experience that money has a way of making every decision emotionalWhen it comes to houses, I point out that most people work all their lives paying for a home they never own In other words, most people buy a new house every so many years, each time incurring a new 30-year loan to pay off the previous oneEven though people receive a tax deduction for interest on mortgage payments, they pay for all their other coco chanel necklace expenses with after-tax dollarsEven after they pay off their mortgageMy wife's parents were shocked when the property taxes on their home went to $1,000 a monthThis was after they had retired, so the increase put a strain on their retirement budget, and they felt forced to move
4 Houses do not always go up in value In 1997, I still have friends who owe a million dollars for a home that will today sell for only $700,000The greatest losses of all are those from missed opportunities If all your money is tied up in your house, you may be forced to work harder because your money continues blowing out of the expense column, instead of adding to the asset column, the classic middle class cash flow patternIf a young couple would put more money into their asset column early on, their later years would get easier, especially as they prepared to send their children to collegeTheir assets would have grown and would be available to help cover expensesAll too often, a house only serves as a vehicle for tiffany jewellery incurring a home-equity loan to pay for mounting expensesIn summary, the end result in making a decision to own a house that is too expensive in lieu of starting an investment portfolio early on impacts an individual in at least the following three ways:
1Loss of time, during which other assets could have grown in valueLoss of additional capital, which could have been invested instead of paying for high-maintenance expenses related directly to the homeToo often, people count their house, savings and retirement plan as all they have in their asset columnBecause they have no money to invest, they simply do not investThis costs them investment experience Most never become what the investment world calls a "sophisticated investor And the best investments are usually first sold to "sophisticated investors," who then turn around and sell them to the people playing it safeI am not saying don't buy a houseI am saying, understand the difference between an asset and a liabilityWhen I want a rolex watch knock off bigger house, I first buy assets that will generate the cash flow to pay for the house
My educated dad's personal financial statement best demonstrates the life of someone in the rat race His expenses seem to always keep up with his income, never allowing him to invest in assetsAs a result, his liabilities, such as his mortgage and credit card debts are larger than his assets The following picture is worth a thousand words:
Educated Dad's Financial Statement
Income=Expense
Asset < Liability
My rich dad's personal financial statement, on the other hand, reflects the results of a life dedicated to investing and minimizing liabilities:
Rich Dad's Financial Statement
Income > Expense
Asset > Liability
A review of my rich dad's financial statement is why the rich get richerThe asset column generates more than enough income to cover expenses, with the balance reinvested into the asset columnThe asset column continues to grow and, therefore, the income it produces grows with gucci bags leather
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